Mexican Economy with a Possible 2.7 or 2.8 percent Growth rate by the End of 2014

After several painful months of near-zero growth, the Mexican economy is showing small but encouraging signs of having turned a corner, driven by an increased foreign appetite for its cars, televisions, and other manufactured goods.

Manufacturing activity, one of Mexico’s critical economic drivers, has steadily increased over the last two months, according to a key economic indicator, the manufacturing purchasing managers’ index from the Mexican Institute of Financial Executives, which showed a 4.4 percent rise to 51.6 in August, up from 49.4 in July.

The increase, economists say, can be attributed to a winning combination of increased public infrastructure spending and a US recovery that’s starting to pick up speed.

“We believe the next six months are going to be relatively good for the Mexican economy, with a possible 2.7 or 2.8 percent growth rate by the end of the year,” says Héctor Villarreal, the head of the nonprofit Center of Economic and Budget Research, a Mexico City-based think tank. “And the best part of this is that there may be even stronger growth next year.”

The good news comes on the heels of a year where the growth in gross domestic product sputtered at 1.1 percent, weighed down by declining oil production, a relatively weak US economy, high electricity prices, and a new tax system that disproportionately hit small- and medium-sized businesses and Mexico’s middle class.

Increased production in manufacturing and steel for exports are the primary contributors to the uptick, Mr. Villareal says, noting that the country’s chemical sector is also expected to “produce a very nice result in the next two years.” Other niche industries, such as agriculture, are just starting to take off.

Mexico’s Manufacturing Purchasing Managers’ Index rose slightly in August and July, which many economists believe points to a turnaround of economic growth after a largely stagnant year (Photo: Reuters)

The growth has also been helped by last year’s decision to increase public infrastructure expenditures by 40 percent, a natural business cycle shift, and possibly by a perception among investors that Mexico is on the rise.

“This [growth] may create a sort of placebo effect, convincing other investors that structural changes in governmental policies are the right thing, and are responsible for bringing in new investment,” Villarreal says.

In a Sept. 2 speech, Mexican President Enrique Peña Nieto, who ran his campaign on the promise of transforming the economy through a series of reforms, emphasized that continuing to improve the country’s sluggish growth rate will remain a key goal of his administration.

“We still have not arrived at the economic growth rates that the country and its people need,” Mr. Peña said. “The challenge of growth is not new for Mexico; achieving an accelerated, sustained and sustainable growth has been our principal economic challenge for decades.”

Villarreal, however, expressed concern that the administration continues to be more focused on stimulating spending, and could be leading the country to untenable deficits within five years. Mexico’s deficit was $48 billion in 2013, up from $39 billion at the beginning of Pena’s term. It currently has more than $300 billion of public debt.

“They are not taking care of the deficit – they believe it is a problem for the next government,” Villarreal says, noting that the growth is well-timed to garner support for Peña in the 2015 mid-term election, but with the negative consequences coming after his term ends in 2018. “They want to push the reforms as strong as possible. The deficit is not an issue anymore.”

IMPACTS

Business

A revived Mexican economy could increase the flow of trade between the US and Mexico, benefiting manufacturers on both sides.

Political

The current PRI administration has promised to deliver economic growth and stands to benefit in the 2015 election from the good news.